The ruling sets up a showdown in federal court over the constitutionality of agency enforcement “in-house” adjudications.
On April 14, 2023, a unanimous Supreme Court of the United States paved the way for future challenges to the constitutionality of agency enforcement proceedings before administrative law judges. In Axon Enterprises v. FTC and SEC v. Cochran, the Court held that litigants can directly challenge the constitutionality of in-agency enforcement proceedings in federal district court, bypassing “in-house” administrative law courts. Axon and Cochran are illustrative of the Court’s increasing scrutiny of administrative agency enforcement mechanisms and the exercise of agency power, such as in Lucia v. SEC, 138 S. Ct. 2044 (2018), in which the Supreme Court invalidated the SEC’s process for selecting administrative law judges (ALJs). See also AMG Capital Management v. FTC, 141 S. Ct. 1341 (2021) (rejecting the FTC’s ability to obtain restitution or disgorgement in addition to injunctive relief); West Virginia v. EPA, 142 S. Ct. 2587 (2022) (holding the EPA lacked authority to impose emissions caps through a pollution-shifting scheme). This is a significant change to existing law.
The SEC and the FTC, like many agencies, have in-house adjudication processes presided over by ALJs, who conduct proceedings, make findings of fact and law, and can impose significant injunctive and monetary penalties. ALJs are officers of the agency, which means that agencies are the investigator, prosecutor and judge―all in one. The agencies also make their own rules of procedure, which allows them to limit the rights of defendants in areas such as discovery and process. Agency decisions are subject to review only by a Court of Appeals, often operating on a very deferential standard of review. The entire process can take years. Axon and Cochran asked the question of whether a litigant who challenges the constitutionality of the administrative court can bypass the agency process and go directly to a federal district court. The government argued that litigants cannot, and that agencies can adjudicate their own constitutionality. The Supreme Court disagreed: Challenges to the constitutional legitimacy of administrative courts and agency enforcement action can now go directly to a federal district court.
The ruling sets up a showdown in federal court over the constitutionality of agency enforcement “in-house” adjudications. Both Axon and Cochran argued that the administrative courts are unconstitutional because ALJs are insulated from the president’s removal authority by a dual layer of protection that violates constitutional separation of powers (ALJs in both the FTC and the SEC can only be removed for cause by agency commissioners, who themselves can only be removed for cause). As inferior officers of the United States, so the argument goes, such officers must be subject to oversight by the president, and insulating them from removal renders the entire agency adjudication inherently unconstitutional. Axon also raised additional, broader structural challenges to the FTC merger process.
Litigants no longer need to endure the expense and time of a full agency proceeding and lengthy appeals process to challenge the legitimacy of an agency court. They can go directly to federal district court. Strong concurrences from Justices Clarence Thomas and Neil Gorsuch suggest that at least some of the justices are willing to go further. It took years to settle on the proper jurisdiction for this question and now the courts will have to decide on the merits. Either way, administrative agencies such as the FTC and the SEC may have to change the way they exercise their enforcement powers.
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